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RESPs - Risks and Restrictions

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Registered Education Savings Plans (RESPs) -> Risks and restrictions

The Risks and Restrictions of RESPs

With a Registered Education Savings Plan (RESP) comes both risk and restrictions.

The greatest risk is that your child will not take part in qualifying post-secondary education.  This will result in paying back the federal grant portion of the RESP, and could result in forfeiture of the earnings in the RESP.  At best, the earnings can be transferred to an RRSP (maximum amount $50,000) if:

bullet there is RRSP contribution room available,
bullet the RESP has existed for at least 10 years, and
bullet the beneficiary is at least 21 years old and not pursuing post-secondary education.

If no RRSP contribution room is available, the earnings can be returned to the subscriber, again only if the RESP has existed for at least 10 years, and the beneficiary is at least 21 years old.  This will attract tax at the subscriber's marginal tax rate, plus an additional tax of 20%.  If the RESP is held in a pooled group scholarship plan, the earnings may be completely lost, with the subscriber getting back less money than was originally contributed, due to fees paid to the promoter.

RESPs are restricted to being used for qualifying post-secondary education.  With some plans, there is a set payment schedule which must be followed.  If the payment schedule is not followed, interest may be charged, or the plan may be terminated.

CESG and CLB Not Payable to Non-Resident Beneficiary

Canada Education Savings Grant Regulations s. 10(3)

Note that if the beneficiary of the RESP is a non-resident at the time of Educational Assistance Payments, then the CESG and Canada Learning Bond (CLB) portions of the RESP cannot be paid.  A beneficiary can be a student at a foreign educational institution and still be considered a Canadian resident in some cases.  See our information on Canadian residents.

Tax Tip:  If you plan to start an RESP, make sure you read and understand all the details first!

Revised: September 20, 2017

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